Tesla And Netflix: A Tale Of Two Very Different Growth Stories

On a valuation spectrum between penny stocks and blue-chip stocks, growth stocks take a peculiar position. Although they are not as nearly as speculative and volatile as penny stocks, growth stocks are based on the expectation they will eventually assume the highest form - blue-chip stocks. After all, blue-chip companies are perceived to deliver both dependable dividends while also growing.

Netflix And Tesla: Two Sides Of The Growth Coin

On this expedited growth journey, some companies fumble while others take a category of their own. This process appears to be unfolding with Netflix and Tesla. Netflix's April earnings report tells a story of hitting the brick wall of expectations, while Tesla's valuation forecast seems to be boundless.

Netflix Stock Ousted From The Growth Club?

Netflix gained its momentum by naturally filling the niche of a dying breed, the video rental business spearheaded by Blockbuster. In fact, the CEO of Blockbuster, John Antioco, spectacularly failed to notice the new video-streaming trend on the horizon. Netflix founders approached him in early 2000 to sell Netflix for $50 million.

Fast forward to late 2021, and Netflix grew by 7,536%, from a $50 million deal offer to a $318 billion market cap. As growth tech companies go, replacing and cornering a specific market, one couldn't have asked for a better result. However, year-to-date, Netflix (NFLX) dropped to rock bottom in early 2022, returning to a December 2017 level market cap of $83.36 billion.

Did Netflix lose its growth stock status?

Not quite. The Covid-19 pandemic may have pumped Netflix's usage as the go-to content delivery platform, but Netflix’s valuation has been heavily reliant on subscriber numbers. It has been an open secret that Netflix has an account sharing problem, which the company tolerated to spur growth, openly admitting as such this April, in a letter to shareholders.

"Our relatively high household penetration - when including the large number of households sharing accounts - combined with competition, is creating revenue growth headwinds. The big COVID boost to streaming obscured the picture until recently."

There are two key admissions here. The baseline for Netflix’s valuation is largely inaccurate because it relied on account sharing. Moreover, with the Covid-19 boost gone, the company is now forecasting a decline in subscribers by 2 million for Q2 2022. Hence, this is why Netflix suffered a valuation reset back to a late 2017 level, as Bank of America downgraded its ranking from "buy" to "underperform" in April.

With a new reset price, Netflix's explosive growth narrative is over, but it also serves as a new starting point. Yet, Netflix itself admits that it will take at least until 2024 until its password-sharing crackdown and ad-boosted subscription monetisation produce a major effect.

Bank of America analyst Nat Schindler said, "It will take a while for investors to believe Netflix can return to growth."

With that said, Netflix revenue for Q1 2022 is still up by 9.8% compared to the same quarter a year prior, at $7.8 billion. While that is not hyper-growth, it is growth nonetheless. When all is said and done, shouldn't it be the case that the removal of unsupported growth figures has the same valuation reset effect on another growth company?

Tesla Continues To Defy The Odds

Tesla's April earnings report showed that the company has 6.5x stronger sales than the year prior. The EVs generated $3.3 billion in Q1 profits, a 658% increase from Q1 2021. Moreover, Tesla reported an 81% increase in total revenue, to $18.8 billion. While these figures are positive, do they justify Tesla's enormous market cap of $797.7 billion?

In other words, is another valuation reset incoming? Over the last 5 years, Tesla's story was one of hyper-growth just like Netflix, gaining 1,137% appreciation. Year-to-date, Tesla (TSLA) stock too suffered a downturn, but not as nearly as much as Netflix (NFLX). 

If anything, it seems that Tesla's downturn can only be attributed to the general equity market decline due to the Fed's interest rate hike. The Fed tapering increases borrowing costs, so investors tend to exit growth — and especially tech — assets into safer commodity harbours. 

Yet, at face value, if any company is due for a valuation reset it would be Tesla. Elon Musk's baseline business model revolves around manufacturing and selling electric vehicles (EVs). Yet, it has done so at a considerable lower rate than traditional car companies. 

Case in point, Ford sold 3.9 million cars in 2021, while Tesla sold less than one million, at 937,172, in the same year. Tesla's market valuation does not reflect this gap in the slightest. In fact, when compared to top car companies, one would think that Tesla is the largest vehicle manufacturer in the world. This leads many investors to classify TSLA as an overvalued stock.

What else is then in play for Tesla to maintain its hyper-growth valuation? Does it mean that Tesla's expectation is more valid than that of Netflix? 

Before anything else, Tesla has the first-mover advantage in the area that counts the most. While there were plenty of EV companies before Tesla, it was the first company to pull out EVs from the cumbersome EV aesthetic. While Tesla had to push their EVs into the luxury vehicle category to make that happen, it successfully made their cars into status signalling devices. 

Governments all over the world further boost this speculation by announcing the gradual ban of gas-operated vehicles. For this reason, there is now the expectation that most vehicles on the road by 2040 will be electric, with Tesla forging the way.

Consumer behaviour has become a factor as well. Despite car insurance rates being generally more expensive for EVs as opposed to traditional gas-powered vehicles, Tesla has taken strides to make their vehicles more affordable. Yet, they also tend to be used as a status signalling vehicle, which generally happens with luxury products.

Combined with Elon Musk's omnipresent online persona, with over 80 million Twitter followers, and SpaceX involvement, this creates a big cushion for Tesla. So much so that not even major supply disruptions can upset Tesla's gains.

With so much market upheaval, it bears remembering why the average stock market return for the last 100 years has remained steady at 10%. While it is anyone's guess if Tesla will keep this momentum going, it also bears keeping in mind that Tesla made it through while openly admitting past underperformance and future downturn. 

"Our own factories have been running below capacity for several quarters as supply chain became the main limiting factor, which is likely to continue through the rest of 2022."

Given such contrast, it is safe to say that Tesla is in its own premium growth stock category, especially now when gas prices are soaring. Case in point, AAA research showed significant pressure to make the transition to EVs when gas prices are up.

At the same time, Netflix, as a software platform, is more of a "take it or leave it" proposition, with many people opting for the latter, viewing Netflix as a luxury item in times of economic distress. While Tesla may offer luxury EVs, abandoning its plan to enter the mid-range category, it appears that Elon Musk managed to fine-tune Tesla's elite brand to absorb negative pressures.

About the author: Shane Neagle is Editor In Chief at The Tokenist.